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John Moffat.
John Moffat.-
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bushra
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Hi, I’m hoping someone can help me on question 3 on the Mar16/Jun16 questions published on the ACCA website. I understand how the conversions were calculated but I’m not sure on how the market values of the loan notes were calculated for both part 1 and 2. Can someone please shed some light on this?
John Moffat
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In order to decide whether to convert after 7 years or wait for 8 years and have them redeemed for cash, we need to know what the market value of them will be in 7 years time.
If they wait for 8 year then they will receive the repayment of $1,000 and also receive one more years interest at 7%, so a total receipt of $1,070.
To get the value in 7 years (which is 1 year earlier) we need to discount the $1,070 for 1 year. Then we can compare with the result of converting in 7 years time with the value of the debt in 7 years and decide which would be better.
bushra
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Thanks John,
I’m not sure how the MV of the lain notes has been worked out.
The answer shows (70 x 5.206) + (1075 x 0.583) = 991.15
I can see how the DF have been used but I’m not sure where the 70 has come from?
John Moffat
- Topics: 57
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The 70 is the interest each year (7% x 1,000), and the market value is the present value of all the future receipts – interest each year and the redemption/conversion.
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